Price of land likely to send rental rates up

Industrial land prices increase threefold in southwest LV

October 12, 2004 - Rents for office and industrial tenants are expected to rise in Las Vegas, driven by land prices and tighter vacancy rates, commercial real estate experts said in their third-quarter market reports.

In the short term, lease rates appear to be holding steady at $4.63 a square foot per year for wholesale and distribution space and $10.67 a foot for flexible space, said Rosalind Holland, research analyst for Grubb & Ellis in Las Vegas.

For her firm, she calculated the third-quarter industrial vacancy rate at 8.2 percent for 75.3 million square feet of total space in the market, with 3.2 million square feet under construction.

As available space is absorbed, rents are expected to increase, Holland said. Also, rising land costs are expected to add further increases to asking rents into 2005.

"Land for new construction is getting harder to come by, making new big-box development a challenge," she said.

Dan Doherty, industrial broker for Colliers International, said developers who once considered $4 a square foot as the standard for industrial land are now paying $12 in the southwest valley. Land around Las Vegas Motor Speedway in North Las Vegas was $5 a foot as recently as a year ago.

Even Apex, north of the Las Vegas, has gone from 20 cents a foot 18 months ago to $2.60 a foot.

"Some of those properties have sold three times," Doherty said about Apex. "You'll see industrial building out there in 2006."

Overall, the industrial market reported strong expansion in the third quarter with 933,000 square feet of industrial space completed, the highest total since fourth quarter 2002, said Brian Gordon, principal of Applied Analysis.

Land prices may limit long-term growth in the industrial market, making it difficult to find and acquire larger distribution centers, he said.

Another key is the rising cost of raw materials, which will influence development in the near future as land owners who bought at lower prices maintain a competitive advantage in rental rates, Gordon said.

"Industrial is tight," said Xavier Wasiak of Grubb & Ellis. "There's not a lot of product. It's the same old story. Land prices continue to rise and that creates difficulty for manufacturers who want to come out here.

"Our tax structure is the main reason business comes here, but increased lease rates, land prices and housing have all made it difficult for business."

Donna Alderson of CB Richard Ellis reported a 7.6 percent industrial vacancy rate Friday during a bus tour sponsored by the Southern Nevada chapter of National Association of Industrial and Office Properties, which looked at nearly 80 projects under construction or completed within the last year.

She said North Las Vegas had the highest vacancy at 11.8 percent, but it's also the submarket with the most intense activity.

"I know it's not very pretty out here, but it is pretty exciting," Alderson said as she pointed out projects such as Trammell Crow's Cheyenne Distribution Center, which signed Walker Furniture to a 420,000-square-foot warehouse lease.

"Land prices have gone up here as well and construction costs continue to rise. We expect to see lease rates go up, but they haven't gone up as fast as other parts of the valley."

Other industrial projects under construction in North Las Vegas include the 2.1 million-square-foot Logisticenter by DP Properties, the 100,000-square-foot Cheyenne Commerce Center by Harsch Investment Properties and the 78,000-square-foot Westland Corporate Center by Westland Enterprises.

The Sunset Parkway Business Center is seen under construction Monday on the corner of Sunset Road and Valley View Boulevard. The development by Majestic Realty is part of the southwest industrial market, the largest in the valley with 27 million square feet and only 4 percent vacancy. Photo by John Gurzinski.

The valley's office market grew to 32.3 million square feet in the third quarter with a vacancy of 9.1 percent and asking rates of $1.88 a square foot per month, according to Applied Analysis.

Net absorption, or the amount of space taken, was 536,000 square feet with slightly more than 2 million square feet under construction.

Vacancy rates have hit the "bottom of the trough" and will likely start to creep back up, Gordon said.

He cited the decline in vacancy rates over the past five quarters as a sign of cautious development that has now unleased a significant amount of construction activity.

"We have and will continue to see the success of office condominium projects as users believe they can build equity by purchasing, rather than renting," Gordon said.

Shea Commercial, an Arizona developer, entered the Las Vegas market a couple of years ago and now has office condos for sale all over the valley.

The company sold out units at Tara Professional on Jones Boulevard at $165 to $170 a square foot and is developing Shea at Spring Mountain with preconstruction prices starting at $175 a square foot for the shell.

Holland of Grubb & Ellis said a growing population in need of service creates a heightened demand for quality office space.

She cited third-quarter vacancy at 12.6 percent, a significant improvement from a year ago when it was near 15 percent. The office market has absorbed 1.25 million square feet through the first nine months, the first time it's topped 1 million since 2000.

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Article ©: H. Smith, Las Vegas Review-Journal